Revisiting China's gradualistic economic approach and financial market

LI, Hao and Wang, Gaowang (2025): Revisiting China's gradualistic economic approach and financial market.

Abstract

We develop a model economy with active financial markets, in which the policymaker's adoption of a gradualistic approach is a Bayesian Nash equilibrium. In addition to its financing role, the financial market also creates a channel for information revelation, encouraging the policymaker to take small policy steps. Smaller policy steps lead to more precise information about the productivity shock. Acquiring more information - both on the extensive margin and the intensive margin - provides sufficient incentives for the policymaker to consistently follow the gradualistic approach. This result holds robust for both exogenous and endogenous information models.

• Item Type: MPRA Paper
• Language: English
• Keywords: the gradualistic approach; active financial markets; information acquisition; endogenous information
• Subjects: G - Financial Economics > G1 - General Financial Markets; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy

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